Investing in selected CCI sectors
(performing Arts, Movie, Music, Games, Books)
Large companies in the cultural and creative industries (CCI) provide the conditions for investors to participate in their economic potential. However, most market participants – and thus most of the economic potential – lies in individual entrepreneurs and small and medium-sized enterprises (SMEs).
Therefor, the actual involvement of investors in selected CCI sectors is marginal. The main reasons are likely to be the lack of know how to evaluate an idea or Intellectual Property, along with the lack of access to creative talent and market opportunities.
Above that, the different sectors are not equally developed in terms of business opportunities and potential returns for Investors. The movie industry attracts a wider range of investors as well as investment professionals, promising high returns with box office hits.
Pre-sales to licensees and completion bonds as a security measure provide a certain security for investors. However, the risk is still high due to large amounts of capital required to produce and launch a major movie. Chart 9 on the following page compares a movie hit with a musical hit.
The sector of the performing arts has not been developed by a wider range of investors or investment firms. In hot spots, such as Broadway or London’s West End, large production companies dominate the production of large-scale musicals and shows. Individual investors are often organized in circles getting access to investment opportunities, often driven by the fun factor of the red-carpet opening nights.
Compared to a movie, where the first weekend box office indicated whether the movie is going to be a hit or a failure, musicals and shows have a long-term prospective. This led in recent years to an increase in Broadway activities of major Hollywood studios. Although it’s a clash in terms of business model and Intellectual Property Right understanding, the Hollywood studios keep strengthening their activities. To the degree, that some say Hollywood is destroying Broadway. However, Disney is about to turn their most successful animated movie Frozen into a musical.
Two patterns within the 11 CCI Sector’s
Visual arts and television are the heavyweights, accounting for more than a third of the economic value generated by CCI (39% of sales and 35% of jobs). With just 6% of CCI workers and 4% of CCI sales, radio and gaming are the smallest CCI sectors, but are evolving in dynamic markets.
Advertising, newspapers and magazines, and architecture are CCI with greater revenues (38% of CCI sales) relative to employee numbers (only 22% of CCI jobs). On the other hand, with 46% of jobs but only 17% of revenues, music, movies, the performing arts and books are the biggest job generators. Yet, labor-intensive CCI include a high proportion of non-permanent workers and creators. In the music industry, 60% of workers are authors and composers, which explains the high number of jobs compared with the revenue figure.
Looking at Investment Funds being active in the field of live theatrical production, it seems that single investments into a Musical or show is too small a ticket in volume and is difficult to evaluate. Having said that, the field seems to become interesting as TPG Capital in New York recently purchased the majority stake in Canada’s Cirque du Soleil. In Europe, CVC Capital purchased a 60% stake in Stage Entertainment, Europe’sleading musical presenter.
Taking a closer look at say Europe, Stage Entertainment generates an average annual revenue of EUR 300 m while the overall for-profit market in Europe generated EUR 17.1b in 2013. Taking the non-profit sector in Europe into account too, the total revenues are EUR 31.7b.
This puts things into prospective and reflects, that the market is not dominated by market leaders but rather consists of a wide horizontal stretch among many players in the market.
It’s that majority of the market, individuals and SME’s, that drive the creative industry around the world. While companies such as Stage Entertainment or Cirque du Soleil provide a business infrastructure for venture capital to invest, this does not count for the market in general. Taking the example of Stage Entertainment, we can assume, that the entire European market of for-profit performing arts is almost untouched. Although the movie industry is fare ahead in dealing with external capital, the overall picture does not change much. The interest and openness on both the creative and the financial side is growing. The time has come to bridge the gap and harvest both creative and profit value.
Market entry barriers for creative Talent
Companies that intent to provide products and services within the CCI sectors must overcome hurdles to enter the market and challenge competitors. Hurdles to enter the market, these can be either structural, strategic or institutional, are limiting the number of products in the market. The main reasons are, in order of importance, the following:
- Access to capital
- Market regulations
- Price competition
To compete in the market big players, must invest large amounts of capital as well as time to develop or acquire know-how and innovation. We see Amazon investing over US$ 17b in 2016 for research and development. This is more than any other company around the world. But the same counts equally for individual creative talent, that tries to develop and launch commercially viable products such as theater plays, books or music in the market.
Value proposition of CCI sectors
Comparing the products and services of the cultural and creative industry with established industries such as technology, it becomes clear that the main difference lies within its value proposition: in technology iindustry, leaders promise the best function. Say Apple as the main producer of desirable Laptops or smartphones offers the best and sophisticated function and design with their products. With Facebook, you enter the largest social network with the best communication tools available. While Google offers the best search engine and web browser, Amazon delivers items at the best possible price within hours to your house.
The value proposition of the cultural and creative industry is not function, but experience. This fundamental difference defines the market in a sense as a horizontal market, where many suppliers offer a wide range of products and services to a wide range of people.
While in each sector one can name at least a dozen of outstanding artists or developers, they reflect a fraction of the overall market participants. Since the value proposition is experience, it draws on individual taste, personal preferences, cultural pattern, historical context, social belonging and many more factors, that attracts an individual to consume a service or product.
Unleashing the market’s potential
While we do find mainstream within the CCI sectors, it’s the digital revolution that fosters the constant growth of niche markets. This is because artists or filmmakers can more easily develop content with very limited budgets, which increases the offering in the market significantly. Above that, new options for an artist to self-promote his work breaks down market control from large players within one sector. If you look at Spotify or Sound cloud, composers and musicians never had such opportunities before. Even for authors the self-publishing of a book is possible today as one of the key drivers for sales is to create your own community attracting followers through social media to your work.
On the consumer side, the Internet/Social Media networks allows people to find and follow creative talent according to their very personal taste. Simply put, it is possible today more than ever before to follow your favorite artists, than those everyone knows.
One can say that the digital revolution unleashes the potential of the cultural and creative industry as it enables both the creator and the consumer side.
Looking at financial resources that are accessible for creative talent in the market and efforts Governments have taken in recent years, it’s mostly focusing with a “we must support” view providing access to microfinance and smaller loan or financial means.
While this is an important approach fueling the industries grass root, the gap lies between the grass root and industry leaders, the SME’samong those creative talents, who have the potential to emerge and grow into an SME or beyond.
The missing link
Coming back to the number one hurdle in the cultural and creative industry for creative talent to enter the market or for SME’s to grow their business – access to capital –appears to be the missing link for the overall industry to unleash its potential for future growth.
But access to capital, be it from the public or private sector alone, will not provide an environment, within which the industry can flourish. Access to industry-specific know-how, the long-term development of a larger economic ecosystem, that provides a reliable and comparable surrounding across country boarders is equally important.
While many products and services of SME’s and creative talent can function and be profitable within a country’s boarder or a region, the international arena is where companies must compete in order to scale their business to become highly profitable. Therefor, access to risk capital at various stages is a necessity and, if you will, the missing link.
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We have dealt extensively with the business models and structures of the international cultural and creative industries, follow market developments in our segments in particular and identify market opportunities with regard to our own and third-party projects. If you are interested, we are at your disposal for an exchange on our market assessment. Please contact us by e-mail at firstname.lastname@example.org or use the contact form.